BLOG VIEW: What Is Going On With The FHA?

t happens when the only game in town runs out of cash?[/b] There is an excellent chance that we will soon find out the answer to that question. In this case, the game is the Federal Housing Administration (FHA), and it appears to be the next in line for a major cash infusion. The Washington Post recently reported that the FHA plans to seek $800 million from Congress to help shore up its reverse mortgage program. On the surface, that would seem peculiar. Reverse mortgages are one of the very few bright spots in today's industry – origination volume is extremely healthy, and the product is experiencing a popularity that its advocates have been predicting for two decades. Unfortunately, the reverse mortgage market is not immune to the problems facing the industry or the general economy. In fact, the default rate on FHA-insured reverse mortgages is spiking dramatically, which is creating an unexpected drag on the FHA balance sheet. Hence, the request for Congressional funding to keep the agency afloat. Considering the agency now lays claim to about 30% of the home loan market, the notion that it is on shaky ground is good reason to give anyone agita. Someone who is concerned about this is Rep. Stephen Lynch, D-Mass., who is drafting legislation that will require FHA to provide twice-annual reports to Congress on its fiscal state. Currently, FHA only needs to provide an annual update on its balance sheet. ‘Problems at the FHA could upset the little recovery that we now have,’ said Lynch in an interview last week with the Boston Herald. ‘Right now, we can't tell where they are at.’ Personally, I think Lynch is going much too easy on the FHA. Instead of requiring two updates per year, I see no reason why the agency shouldn't be required to provide quarterly reports on its activities and finances. The problems with the reverse mortgage program, in particular, would require vigorous monitoring – especially when one considers that James A. Heist, the assistant inspector general at the U.S. Department of Housing & Urban Development, is on record outlining a rising level of fraud relating to FHA's Home Equity Conversion Mortgage (HECM) program, which makes up 90% of the reverse mortgage market. Even more disturbing is the possibility of yet another bailout – this time, a federal agency and not a private-sector entity or government-sponsored enterprise. Granted, $800 million is peanuts compared to the other sums that have been thrown at the various too-big-to-fail financial services providers and Fannie and Freddie. However, the federal government doesn't have a spare $800 million to pull out of a pocket, and there is no guarantee that this bailout request will be a one-time aberration. Federal law requires the FHA's cash reserves to be at least 2% of the value of its outstanding mortgages. The most recent report finds the reserves hovering at the 3% level. In automotive terms, that would be known as running on empty. An ailing FHA is in no one's best interest, and proactive efforts need to be put in place to ensure the agency remains solvent. Furthermore, the reports of fraud in the HECM program need to be made a top priority of federal law enforcement – the damage this could create, if it remains unchecked, will have a devastating effect on the industry as a whole and senior citizens in particular. In speaking with the Boston Herald, Lynch sounded the alarm on a debacle waiting to blossom. ‘They could have billions of dollars in liability,’ he said of the FHA. ‘I want answers now.’ Indeed, it is time for the nation's lawmakers and the industry to get serious and demand regular updates on the FHA about its state of affairs. – Phil Hall, editor, [b][i]Secondary Marketing Executive[/i][/b]. [i] (Please address all comments regarding this opinion column to


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